2016 (8) TMI 132 - HC - VAT and Sales Tax

Court overturns tax credit reversal penalties, stresses need for reasoned decisions & lawful precedents

The Court set aside the assessment orders challenging input tax credit reversals and proposed penalties under the Tamil Nadu Value Added Tax Act and ... Input tax credit reversal - reversal of input tax credit on vendor default - reversal of input tax credit for non-reporting by other dealers - penalty for escapement of taxable turnover - requirement of reasoned order / duty to record reasons - remand for fresh consideration where reasons are absentInput tax credit reversal - reversal of input tax credit on vendor default - Proposal to reverse input tax credit under Section 19(15) of the Act because suppliers' registration certificates were cancelled - HELD THAT: - The Court held that reversal of input tax credit merely on the ground that the selling dealers' registration certificates stood cancelled does not justify denying the purchasing dealer's claim where the purchasing dealer had complied with the prescribed requirements under the Rules and showed proof of payment of tax to the vendor at the time of self-assessment. The Court relied on earlier decisions of this Court in Sri Vinayaga Agencies and Infiniti Wholesale Limited , which apply the principle that where the purchasing dealer fulfils Rule 10(2) and the statutory proviso to Section 19(1) is attracted, the liability to recover tax from a defaulting vendor lies on the vendor and cannot be visited on the purchasing dealer by way of reversing ITC without appropriate inquiry and reasons. Accordingly, the proposal to reverse ITC under Section 19(15) was held not tenable. [Paras 6, 8]Proposal to reverse input tax credit under Section 19(15) set aside.Reversal of input tax credit for non-reporting by other dealers - input tax credit reversal - Proposal to reverse input tax credit under Section 27(2) of the Act on the ground that other end dealers did not report sales turnover - HELD THAT: - The Court found that the assessing authority did not indicate how the issue was considered nor did the show cause notices and orders disclose material to justify reversal under Section 27(2). In absence of discussion, reasons or material in the record demonstrating entitlement to reverse ITC on this ground, the proposal was erroneous and unsustainable. The Court emphasised that an assessing officer must record reasons and base any reversal on material and proper application of law rather than conclusory allegations about non-reporting by other dealers. [Paras 9]Proposal to reverse input tax credit under Section 27(2) held erroneous and not sustainable.Penalty for escapement of taxable turnover - Proposal to levy penalty under Section 27(4) where there was no allegation of escapement of taxable turnover and returns/accounts were accepted - HELD THAT: - The Court noted that there was no material alleging escapement of taxable turnover and that the books/accounts filed by the dealer had been accepted by the assessing authority. In those circumstances, levy of penalty could not be sustained. The Court referred to the law on imposition of penalty where no escapement is shown and where returns based on accounts have been accepted by the authority, and concluded that penalty cannot be imposed in the present case. [Paras 4, 10]Proposal to levy penalty under Section 27(4) cannot be sustained.Requirement of reasoned order / duty to record reasons - remand for fresh consideration where reasons are absent - Validity of the impugned assessment orders in view of absence of discussion of the petitioner's objections and failure to record reasons - HELD THAT: - The Court found the impugned orders to be cryptic and arbitrary, noting that the assessing authority failed to address the detailed objections and the precedents relied upon by the petitioner and did not record reasons to justify reversal of ITC or imposition of penalty. The Court observed that an assessing order must speak for itself and that a counter-affidavit cannot supply reasons absent in the order. For these reasons, the Court held the orders unsustainable and remitted the matters to the respondent for fresh consideration, directing the respondent to consider the petitioner's detailed objections and the decisions relied upon and to pass a reasoned order on merits in accordance with law. [Paras 5, 11]Impugned orders set aside and remitted for fresh consideration with directions to consider objections and pass reasoned orders.Final Conclusion: The assessment orders for the years 2009-10 to 2014-15 are set aside; proposals to reverse input tax credit under Sections 19(15) and 27(2) and to levy penalty under Section 27(4) were held unsustainable; the matters are remitted to the assessing authority for fresh consideration and for passing reasoned orders after considering the petitioner's objections and the precedents relied upon. Issues:Challenge to assessment orders for multiple years under Tamil Nadu Value Added Tax Act and Central Sales Tax Act; Reversal of input tax credit under Section 19(15) and Section 27(2) of the Act; Proposal to levy penalty under Section 27(4) of the Act.Analysis:The petitioner, a registered dealer under the Acts, contested assessment orders from 2009-10 to 2014-15. The respondent issued show cause notices proposing to revise turnover based on input tax credit reversals and unreported sales turnovers. The petitioner objected, citing legal precedents. However, the respondent's orders lacked discussion on objections and legal references, indicating arbitrariness and neglect of duty, as orders must stand on their own.Regarding the reversal of input tax credit under Section 19(15), the Court referenced past cases where cancellation of vendors' registration certificates did not warrant reversal of input tax credit for purchasing dealers. The Court emphasized that as long as purchasing dealers complied with requirements, the Revenue could not deny claims without taking action against vendors.Similarly, the proposal to reverse input tax credit under Section 27(2) was found erroneous due to lack of discussion and supporting evidence in the show cause notices. The Court highlighted the necessity for proper justification and factual basis for such actions.Concerning the levy of penalty under Section 27(4), the Court referred to a Supreme Court decision emphasizing that penalty cannot be imposed without evidence of taxable turnover escapement. Since the Authority accepted the books, penalty imposition was unwarranted.Consequently, the Court deemed the impugned orders unsustainable and set them aside. The matters were remitted back to the respondent for fresh consideration, directing a reasoned decision based on the petitioner's objections and legal references. The Court closed the case without costs, ensuring a fair and lawful review process.